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Keystone pipeline in Kansas part of a much bigger story

Correction: An earlier version of this story contained an incorrect Kansas county in which TransCanada has a pipeline.

Backers of the Keystone XL Pipeline are gearing up for (yet) another showdown in the five-year-long fight over whether to build the pipeline from Canada to the Gulf Coast – but, in Kansas, the debate’s been a big yawn.

That’s because Keystone owner TransCanada already built a pipeline across Kansas, including in Marion, Butler and Cowley counties. The oil started flowing in 2011.

The Keystone XL is a nearly 1,200-mile-long pipeline project that runs from the oil-rich tar sands in eastern Alberta, Canada, to the refineries in the Houston area.

Controversy arose primarily over the still-unbuilt northern part – from Hardisty, Alberta, to Steele City, Neb., a tiny town northeast of Concordia just over the Kansas-Nebraska border. At issue is whether the U.S. Department of State will issue the permit for the pipeline to cross the border between Canada and the U.S..

The southern legs of the pipeline, from Steele City to the pipeline hub of Cushing, Okla., and from Cushing to the refineries in the Houston area, have already been built.

There was little controversy in Kansas over the Keystone XL, and little direct tax benefit, either. The Kansas Legislature in 2006 agreed to waive property taxes on new pipelines in Kansas for the first 10 years. That has cost the state and the six counties the Keystone pipeline passes through roughly $15 million year. The state later changed its mind on Keystone, but lost in court.

But while Keystone XL may be somewhat of a non-story in Kansas these days, it’s part of a much bigger story that is having a big impact. That story starts with the surge in oil production in the central North America, continues with oil transportation issues from coast to coast, and includes how the refining industry is responding to the huge increases in supplies.

In just one big example, the NCRA refinery in McPherson is spending nearly $1 billion to upgrade and expand its plant, in part to take advantage of the increased flow of heavy Canadian oil. At the moment, 1,400 contractors are working on the massive project set to be completed in 2016.

There are other pipelines being built across Kansas as well, for more or less the same reasons as the Keystone XL: A lot more oil is being produced in the Bakken field of North Dakota and Montana, as well as in Alberta, and it needs to reach the distribution and refinery hubs.

“There is an impact, but it’s indirect,” said Jim Williams, of energy analysis firm WTRG Economics.

Building capacity

What is driving so much of the pressure behind the Keystone XL and, really, all of the oil pipeline activity in the last four years is the surge in oil production in North America.

Until a few years ago, the pipeline system in central North America was built to carry crude oil or finished petroleum products from the Gulf Coast north to the central U.S.

But as horizontal drilling in the Bakken formation of North Dakota and Montana, and the increased production in the Canadian tar sands surged, producers clamored for more and cheaper ways to get their oil to market.

Existing pipelines are at capacity and the excess must be loaded onto barges, trucks and railcars, which is more expensive and less safe that transporting oil through pipelines. In the last two years, the volume of oil shipped by rail from Canada to the U.S. has increased 1,000 percent, to 160,000 barrels per day, according to industry analyst RBN Energy.

About a year ago, a trainload of crude oil derailed in Lac Megantic, Quebec and exploded, incinerating much of the town and killing 47 people. Three rail workers have been charged with criminal negligence.

Environmentalists oppose Keystone XL because they oppose the production of oil in the tar sands of Alberta, saying the oil is dirty and the extraction environmentally destructive. Extracting oil from the tar sands involves strip mining the sites and injecting steam into the ground to free the oil-rich bitumen in the soil. The resulting oil has a high sulfur content and requires special refining equipment.

There are already several pipelines that run from Alberta into the United States, including the existing Keystone, predecessor of the Keystone XL, also owned by TransCanada.

Proponents of Keystone XL say the oil is a good alternative to greater dependence on petroleum bought from unstable or dangerous regions overseas.

Two weeks ago, the U.S. Senate’s Energy Committee, led by Sen. Mary Landrieu, D-La., who is up for election this year, reported out a bill approving the Keystone XL.

However, the Senate’s Democratic leadership has not allowed a vote on the measure. Sen. Mitch McConnell, R-Ky., the Senate minority leader, is calling for Majority Leader Harry Reid to allow a vote on legislation.

Under federal law, the State Department is responsible for approving the pipeline because it crosses an international border. But President Obama announced earlier this year he would delay the decision indefinitely to allow for more public comment on the issue.

How it affects Kansas

While Kansas’ portion of the line is built, the state could see an impact from the completion of the pipeline – and from the surge in oil production generally.

The last two years have been extraordinarily profitable for the state’s three oil refineries: the 85,000-barrel-per-day NCRA refinery in McPherson; the 115,000-barrel-per-day CVR Refining in Coffeyville; and the 135,000-barrel-per-day HollyFrontier refinery in El Dorado.

Because the amount of oil produced in Canada and North Dakota has outpaced the pipeline system, bottlenecks have developed. That allows refiners in Kansas to buy that oil at a discount and sell at normal prices, pocketing a fatter margin.

The result has encouraged refiners to try to capture more of the oil. NCRA is spending almost $1 billion to replace an old coker unit and to expand the plant from 85,000 barrels per day to 100,000 barrels per day. The upgrade and expansion will allow the refinery to process more heavy, high-sulfur Canadian crude, according to the company.

NCRA already buys some Canadian oil transported on the Keystone pipeline through Kansas. But NCRA spokeswoman Lani Jordan said the refinery gets more than half of its daily supply of oil from Kansas, making it the state’s biggest buyer of Kansas oil, and that won’t change with the expansion.

The Coffeyville Resources refinery in Coffeyville also buys Canadian oil shipped by the Keystone pipeline. It reported in recent filings that 17 percent of its oil supply is medium or heavy sour crude, typically from Canada.

But the opening of the two southern legs of the Keystone, and other southern pipelines, have cut those margins. With the additional capacity, producers had more choices about where to sell their oil.

For Kansas producers, that could mean significant gains from the sale of their product as their oil is sold for closer to the world price.

Refiners, on the other hand, are seeing their margins shrink with the opening of the new pipelines. The price differential between the world price and the benchmark oil produced in the region, West Texas Intermediate crude, used to be about $20 a barrel. Now, it’s $5 or $6.

HollyFrontier, which owns the refinery in El Dorado, saw its gross refinery margin per produced barrel fall 65 percent between the last quarter of 2012 and the last quarter of 2013.

“All good things come to an end,” said Sandy Fielden, director of energy analytics for RBN Energy in Austin.

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